Is Collective Bargaining Pareto Efficient? A Survey of the Literature

It would be difficult, even today, to argue that labour unions are not important economic institutions, and it is this importance that makes their consequences for efficiency so substantial. Interest in the economic analysis of unions was revived in the early 1980s, in large part by a paper by Ian McDonald and Robert Solow, which formalized ideas first expressed in the context of labour markets 35 years earlier by Wassily Leontief. The standard textbook model of the labour union treats the union as a conventional monopoly seller of labour, selecting the wage while the firm chooses the level of employment; McDonald & Solow, however, drew from Leontief’s work to suggest an alternative in which the firm and union negotiate to a Pareto efficient contract. Further theoretical work followed, and a still-growing empirical literature began to develop; a wide variety of empirical procedures and tests have been attempted, with a diverse and contradictory range of findings. Given the importance of the question of union contract efficiency, an up-to-date survey of the literature may be useful in synthesizing past results and pointing the way to future research, and it is this role which the current paper will attempt to fill.     

The influence of legal status on the labor market impact of immigration

This article explores US labor market changes that would take place as a result of an amnesty that would regularize the status of undocumented workers without changing the total size of the alien workforce. The theoretical analysis suggests that the influence of legal status on market wage rates and on minimum wage enforcement is weak and that to the extent that there is an effect, it depends on particular institutional arrangements. Although data are not adequate for a definite measurement of these effects, those data that are available support this conclusion. It appears that the presence of undocumented as opposed to resident aliens can weaken union organizing efforts.     

Patterns of union membership and relative wages

This paper, using the Panel Study of Income Dynamics, examines the effects of union membership on the wages of white males. The empirical relationship between current wage and union status is estimated controlling for union status in years before and after the current year. The resulting status profiles are four years long in contrast to one or two years used previously. Results indicate that wage changes experienced when workers join or leave unions vary significantly and systematically across these profiles. For example, a status change that appears to be long-term is associated with larger absolute wage changes than short-term changes in status. The authors thank Jeff Moore for comments and suggestions on an early draft of this paper and express special appreciation to John Raisian for his painstaking and valuable review of a recent draft. We are, of course, responsible for remaining errors.     

The union wage effect in Canadian manufacturing industries

Data for Canadian manufacturing industries, at the two-digit level, are used to examine the component elements of the union wage effect. The results show that absence of compulsory union membership for all employees in the bargaining unit served by a union does not significantly impair the ability of the union to negotiate wage gains. That is, our results imply that there is little reason for unions to devote much effort to negotiating the stronger forms of union security — union or closed shops. A second implication of our results is that significant bargaining advantages may accrue to unions with an international (U.S.) link, relative to Canadian national unions.     

The Ross-Dunlop debate and union wage concessions: A median voter analysis

The Ross-Dunlop debate concerns the extent to which unions take into account the trade-off between wages and employment in formulating their wage demands. This paper develops a median voter model of union behavior that offers a new approach to resolving the Ross-Dunlop debate. The model shows that when the binding constraint on the median union member in the seniority distribution is the threat of layoff, the union will behave as a “Dunlop-type” union; when the binding constraint is the cost of striking, the union will behave as a “Ross-type” union. The model is then applied to the related issue of union wage concessions. Two questions are examined: Under what conditions will a union agree to wage concessions? How large a cut in wages will be accepted?     

The threat of unionism and wage-coverage effects

This study finds that the union/nonunion wage differential decreases with local labor-market coverage. In general, SMSA coverage has a negligible impact on union wages, and nonunion wages increase significantly with coverage. This is consistent with strong threat effects operating at the local labor-market level. As with most other wage-coverage studies, however, union wages increase more quickly with industry coverage than do nonunion wages. These results support the argument that distinctly different economic processes underlie local labormarket and industry-coverage effects. Economies in the provision of union services imply that union threat effects will be most salient at the local labor-market level. Industry wage-coverage relationships are dominated by the positive effect of product-market coverage on union bargaining power. Estimated coverage effects vary by major industry groupings and are sensitive to changes in the specification of the wage equations. The author acknowledges the helpful comments of an anonymous referee and the competent research assistance of Harold Leong.     

Unemployment,union density,and wages

We investigate, both theoretically and empirically, whether long-run industry unemployment rates modify the wage impact of union density on the earnings of members. Our theory suggests that the density effect increases as unemployment increases. Our empirical estimates use wage equations exclusive and inclusive of unemployment and of the interactive effect of unemployment and density in influencing wages. Based on a 1985 sample of manufacturing production workers, our findings indicate that the wage effect of union density for union workers as usually measured is only 41 percent as large as the effect when unemployment is in the model.     

Efficiency Wages,Unemployment Benefits and Union—Firm Wage Bargaining: The Issue of the Choice of the Outside Option

This paper points out that there may be a logical consistency issue in choosing the reference wage in efficiency wage models. We have shown that defining the outside option in the efficiency wage logic as the market-clearing wage solves this difficulty, and is justifiable in terms of the assumed behaviour of workers and employers. The model that we examine confirms earlier findings of reinforcing effects between union-firm bargaining and efficiency wages. However, if union preferences vary between wages and employment, Summers’ reinforcing effect is no longer present for each value of the parameter describing these preferences. Above a certain threshold value of union preferences for employment, the two mechanisms do not reinforce each other anymore.     

The effect of the extent of unionism on union and nonunion wages

This paper provides estimates, derived from micro wage equations, of the effects of unionism on the wages for both union and nonunion labor. These equations control not only for union status, but also include measures of the extent of unionism in product and labor markets. The results suggest,inter alia, that an increase in the extent of unionization in an industry has substantial positive effects on the wages of nonunion as well as union workers. Increases in the extent of union coverage within an occupation, however, have little or no effect on nonunion wages.     

Whatever happened to the monopoly theory of labor unions?

This paper argues that unions act in accord with the conventional cartel or monopoly model. The basic premise is that it is useful to ask what a “union maximizes” because if more wealth is available, union decision-makers have an incentive to capture it for themselves or their membership. In the formal model, unions negotiate wage rates which maximize the monetary surplus above the supply price of labor, providing an endogenous answer to the questions of how union employment and wages are simultaneously determined. Comparative static analysis yields empirical predictions about the behavior of union employment, wage rates, and union-nonunion wage differentials. I would like to acknowledge helpful comments by Richard Anderson, Ray Battalio, Hugh Macaulay, Michael Ormiston and Akira Takayama on earlier drafts of this paper. The usual caveat applies.     

Union wages, rents, and skills in health care labor markets

We examine the effect of unions on the earnings of health care workers, with emphasis on the measurement and sources of union wage premiums. Using data constructed from the 1973 though 1994 Current Population Surveys, standard union premium estimates are found to be substantially lower among workers in health care than in other sectors of the economy, and to be smaller among higher skill than among lower skill occupational groups. Longitudinal analysis of workers switching union status, which controls for worker-specific skills, indicates a small impact of unions on earnings within both high and low skilled health care occupations. Evidence is found for small, but significant, union threat effects in health care labor markets. It has been argued that recent legal changes in bargaining unit determination should enhance union organizing and bargaining power. Although we cannot rule this out, such effects are not readily apparent in our data. The authors appreciate the assistance of David Macpherson, who helped develop the CPS data files used in the paper.     

WHY DO WORKERS JOIN UNIONS? THE IMPORTANCE OF RENT SEEKING

Union status models ignore the fact that rent-seeking prospective members have an incentive to bid up entry costs so that higher union wage gains make union jobs more costly to obtain. The standard presumption that higher union wages cause firms to substitute toward higher quality workers is shown to be incorrect under most plausible assumptions; the observed positive correlation between wage gains and the propensity to join a union underestimates the size of the true supply response. The union/nonunion wage differential reveals more about the social cost of unions than the gain to an individual worker from union membership.     

Reconsidering union wage effects: Surveying new evidence on an old topic

I examine evidence on private sector union wage gaps in the United States. The consensus opinion among labor economists of an average union premium of roughly 15 percent is called into question. Two forms of measurement error bias downward standard wage gap estimates. Match bias results from Census earnings imputation procedures that do not include union status as a match criterion. Downward bias is roughly equal to the proportion of workers with imputed earnings, currently about 30 percent. Misclassification of union status causes additional attenuation in union gap measures. This bias has worsened as private sector density has declined, since an increasing proportion of workers designated as union are instead nonunion workers. Corrections for misclassification and match bias lead to estimated union gaps substantially higher than standard estimates, but with less of a downward trend since the mid 1980s. Private sector union gaps corrected for these biases are estimated from the CPS for 1973–2001. The uncorrected estimate for 2001 is .13 log points. Correction for match bias increases the gap to .18 log points; further correction for misclassification bias, based on an assumed 2 percent error rate, increases the gap to .24. Reexamination of the skill-upgrading hypothesis leads to the conclusion that higher union gap estimates are plausible. The conventional wisdom of a 15 percent union wage premium warrants reexamination.     

MINIMUM WAGE EFFECTS WITH OUTPUT STABILIZATION

What are the effects of legal minimum wage rates on the U.S. economy? Does minimum wage legislation promote the economic self-interest of high wage union labor and impede the economic self-interest of capitalists as our earlier research [Cox and Oaxaca 1982] suggested? This paper uses a nine sector econometric/simulation model of U.S. industry from 1975–1978 to answer these questions in the context of stabilization policies which hold aggregate real output constant. While most simulated percentage effects are small, those for the unskilled workers themselves are not. A 15.7 percent increase in the average nominal wage rate of unskilled labor, as a result of minimum wage legislation, produced an 11 percent decrease in unskilled employment, 2.2 million jobs lost, while increasing the real wage of unskilled workers by 15 percent. Simulated changes in several key variables support our earlier observations that the self-interests of labor unions, with skilled workers, conflict with those of capitalists over the issue of minimum wage legislation.     

What Do Unions in China Do? Provincial-Level Evidence on Wages,Employment, Productivity,and Economic Output

Utilizing provincial-level data from the period of 1994–2008, this article studies the relationship between union density and wages, employment, productivity, and economic output in China. The findings indicate that union density does not affect average wage levels, but is positively associated with aggregate productivity and output. We discuss if and to what extent these findings are consistent with the familiar two faces of unions model and alternative explanations relevant in the context of Chinese labor and union institutions.     

Does International Outsourcing Really Lower Workers’ Income?

We analyze the impact of international outsourcing on income, if the domestic labor market is imperfect, i.e. there is a bilateral bargaining between a firm and a labor union. In our analysis we distinguish between the cases where the parties negotiate over the wage only and where they negotiate over both wage and profit sharing. We find in the first case that outsourcing has an ambiguous effect on the workers’ income, while it increases the workers’ income in the second case. For the optimal amount of international outsourcing, we find that, depending on the wage effect of outsourcing, in a pure wage bargaining system it can be higher or lower than the level where domestic and foreign marginal labor costs are the same. In contrast, in a wage and profit share bargaining system, the amount of outsourcing lies below this level.     

Labor market contracting and wage dispersion

This paper uses a variety of data sources to document the effect of long-term contracts (LTCs) on wage dispersion. The paper first shows that LTCs are responsible for the decrease in wage dispersion observed as labor markets tighten; absent LTCs (as in most other advanced nations outside North America), this effect does not exist. The paper next examines the relationship between cost-of-living escalators (COLAs) and wage dispersion. COLAs are typically found only in those countries that rely on LTCs, although the incidence of COLAs in these nations is affected by inflation variability. Thus, in the United States, COLAs became much more prevalent in long-term contracts during the 1970s, which caused an increase in wage dispersion, particularly between the union and nonunion sectors. The paper concludes that, despite some suggestions that we ban LTCs and COLAs because of their perverse effects on wage dispersion and other economic outcomes, such a ban would be unwise in light of historically high levels of industrial strife in those nations that rely on these contractual devices.     

Union density effects in the supermarket industry

Unions provide higher than competitive wages for members, but their effect on non-union wages is not clear. We investigate the effect of union density on supermarket wages from 1986 to 1993, a period of declining real wages and declining union membership. Full-information maximum likelihood techniques are used to estimate log wage equations for both the union and nonunion sectors. Decomposition techniques then separate the union wage premium into the relative effects of densities and union membership. We find a significant, positive effect of union density for both union and nonunion employees. This effect explains approximately one-third of the union-nonunion wage differential. This research was conducted while Johansson was a graduate research assistant at the University of Minnesota.     

Compensation of Foreign and Domestic Nurses in the US

This study tests the union skill homogeneity hypothesis by examining whether the erosion of foreign-domestic wage differentials reported in past studies varies by union status. We argue that the common practice of unions negotiating standardized wages promotes skill homogeneity that allows high credential-low unmeasured skill foreign nurses the opportunity to receive wages that match high credential domestic nurses without foreign nurses relying heavily on their labor mobility. Findings show returns to domestic experience accrue faster for foreign nurses belonging to a union compared to returns for non-union foreign nurses. In general, findings on pension coverage indicate foreign nurses also benefit from belonging to a union, while findings on employer sponsored health care benefits indicate a lack of any notable differences in the receipt of this compensation by foreign and union status.     

A utility-production model of union behavior

This paper expands the scope of the economic analysis of unions by presenting a model that is unusually general with regard to both union leadership objectives and the constraints placed on their behavior and by applying this model to a wide-ranging set of political and economic issues regarding unions. The model assumes that union leadership maximizes an objective function containing both political and economic goals and is constrained by the membership and the firm, as well as by a set of technological constraints. The latter constraints are based on the assumption that union power can be modeled as a partially exogenous production process. After defining the Lagrangian and first-order conditions, the model is compared to previous models of leadership objectives and applied to the analysis of union wage concessions and internal union democracy. The comments of Sinan Koont, Donald R. Williams, Jean-Jacques Rosa, Scott Dennis, and anonymous referees on earlier drafts are greatly appreciated. Remaining errors, of course, are my own.